Making Inventory Better

I think most retail outlets take a physical inventory every few months to know exactly what they have in stock.  Those numbers then get plugged into accounting systems and are used to calculate a true cost of goods sold since the last inventory period, which is necessary to see the real profitability of their business.

Up until now, for the most part, we’ve done the same thing.  We have our inventory system that automatically deducts an item every time one is sold, but over the course of several months it becomes inaccurate.  Either someone doesn’t enter in an order we receive from a vendor, or we don’t properly account for re-ships, returns, and products we take for our own use.  We’ve been taking inventory every 2-3 months.  For that one day our numbers are perfect.  George uses them to produce a true snapshot of how the business has done the past few months.

And then, every day after our physical inventory, the numbers get a little less accurate until the next time.  The biggest problem is when we don’t enter an order from one of our vendors, because a whole line of items can be off by 25 or 50 each.  We do the best we can to not have this happen, but ultimately less important things like entering inventory sometimes get lost in the day to day chaos.

Any company that does inventory like this gets hurt in two ways:

  1. You can only take an accurate financial snapshot of your company a few times each year.  Now, we almost always know how we’re doing because our expenses are nearly fixed, margins are roughly always the same, and our back-end system tracks estimates of revenue and profitability (not to mention, exact revenue numbers are always available to us).  Still, knowing exactly how profitable (or not profitable) you are at all times is pretty important. Something you should be looking at all the time in my opinion.  If I can look at Google Analytics on a daily basis, why shouldn’t I be able to look at our balance sheet?
  2. Physical inventories are a pain in the ass.  They normally involve shutting business down and working overnight or on weekends (Saturdays for us).

Now that we have our first employee on hand, and now that he’s doing a really good job, we’ve decided to take a new approach to inventory.  I built a system that randomly picks 15 items each day for him to count.  We print out a sheet for him, he counts, and then we adjust our system accordingly.  We print the sheet as soon as orders are run for the day and he doesn’t start counting until the orders are actually pulled, ensuring the numbers on the sheet match up with the ones on the shelves.  He also gives us a +/- value and not an absolute to enter back into the system.  This prevents an error if an order comes through while he’s counting.

Over the course of 8 weeks or so he will take a full inventory.  The randomness is important because it will quickly catch any large orders that weren’t entered into the system.  Let’s say for example, that a Chemical Guys order doesn’t get entered in.  Odds are that within a few days of random product selection, at least one Chemical Guys product will appear on his list to check and he’ll notice that the entire line of products is off.  Conversely, if we did one brand at a time it could be 7 weeks before Chemical Guys appeared on his sheet.

The system isn’t foolproof.  We’ll still probably be off by a few on several products at all times.  Essentially, we’re saying that we’d rather be 95% accurate all the time instead of 100% accurate on six days a year. Once John finishes several weeks of checking, I’m going to start kicking George a nightly email with all the numbers he needs to incorporate our COGS into his daily accounting.   We’ll have more accurate numbers to review every single week at our meeting.  We also won’t have to come in on Saturdays, except at the end of December to do one final inventory for our taxes.

Overall, this is a huge time saver for us and hopefully the extra data point helps us notice financial trends sooner.

7 comments on Making Inventory Better

  1. Rob says:

    Just a quick point (that I’m sure you’ve realised and dealt with) – If it’s a truly random set every day rather than a ramdomised list that is created once and stepped through every day there’s the (small) possibility that you’ll check some inventory items two or three times and may not check others for very long periods.

    • Adam McFarland says:

      Good catch Rob. I failed to mention that the system records the date an item was last checked and doesn’t pick it again until every item has been checked.

  2. Neville says:

    This is AWESOME

  3. m4stono says:

    you’re younger than me, but you’re better

  4. Rob says:

    Just re-read this post. Props for the system, but I think the real gem here is the above comment 😉

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